Schottenstein Zox & Dunn

In the recently issued 2009 Final Inpatient Prospective Payment Systems (IPPS) Regulation, the Centers for Medicare and Medicaid Services (CMS) finalized a number of the rules that were proposed in the Proposed Medicare Physician Fee Schedule Rule on July 2007. New provisions will be effective October 1, 2008, addressing when a physician will "stand in the shoes" of a physician organization, interests in retirement plans, burden of proof, period of disallowance, alternative compliance for missing signatures, and obstetrical malpractice insurance subsidies. A delayed effective date of October 1, 2009, applies to a new prohibition on per unit and percentage compensation in certain lease arrangements, and revision of the definition of "entity" to encompass "under arrangements" service providers. CMS elected not to finalize the proposal requiring an entity that provides designated health services (a DHS entity) to "stand in the shoes" of its subsidiary.

Stand in the Shoes

The concept that physicians should "stand in the shoes" of their physician organizations so that the relationship between a DHS entity and a physician organization must meet an exception for a direct compensation relationship was adopted in the Stark Phase III regulations, but caused immediate consternation, particularly because of its potential effect on "mission support payments" from hospitals to their employed physician practices.  After delaying effectiveness for certain arrangements, then proposing complicated rules and conventions for applying both a physician stand in the shoes principle and a DHS entity stand in the shoes principle, CMS settled on a more straightforward approach. First, CMS elected not to finalize the DHS entity stand in the shoes proposal, thus eliminating the need for complicated conventions in deciding what order to apply the stand in the shoes principles. Second, CMS narrowed mandatory application of stand in the shoes to physicians with an ownership or investment interest in the physician organization. CMS also excepted from this rule physicians whose ownership interest is titular - i.e., they have none of the financial benefits of ownership. Thus, the stand in the shoes principle will not apply to a physician organization solely owned by a health system, whether for profit or nonprofit, eliminating the concerns with support payments. Third, the final rule allows non-owner physicians and physicians with titular ownership to stand in the shoes of their physician organization. Thus, if a physician organization has both owner and non-owner physicians, the DHS entity can elect to treat the non-owner physicians as standing in the shoes of the physician organization so that it does not need to perform both a direct compensation analysis for the owner physicians and an indirect compensation analysis for the non-owners.

The definitions of "physician" and "physician organization" are finalized in the manner that was proposed in the 2009 Proposed IPPS Rules. The definition of "physician" specifies that a physician and a professional corporation that is solely owned by that physician are the same for purposes of the Stark rules. "Physician organization" is defined as a physician, a physician practice or a group practice that meets the requirements of the Stark regulations.

Interests in Retirement Plans

As proposed, CMS narrowed the exception for interests in a retirement plan to an interest in a DHS entity held by a physician through a retirement plan offered to the physician as an employee of that DHS entity. CMS indicated concerns that the retirement plan exception was being used to permit physicians to invest in unrelated DHS entities through their retirement plans.

Burden of Proof

CMS finalized its proposal to specify in the rule that when payment is denied on the basis that the service resulted from a prohibited referral, the ultimate burden of proof is on the DHS entity, and clarified that this applies at each level of appeal. The rule also provides that the burden of production is on the DHS entity initially, but may shift to CMS depending on the evidence produced.

Period of Disallowance

The rules as finalized make clear that they are intended to establish the outside date for the end of the period during which DHS referrals are prohibited. CMS emphasizes that the parties may seek to establish that the financial relationship ended earlier. Under the final rules, the period of disallowance ends no later than the date that the financial relationship is brought into compliance with all requirements of an exception, if the noncompliance does not relate to compensation. If the noncompliance relates to compensation, the period of disallowance ends when all requirements of an exception are met and all excess compensation is repaid or all additional required compensation is paid.

Alternative Compliance with Missing Signature

In response to industry pleas for relief from strict compliance with the procedural requirements of the various exceptions for compensation relationships, CMS adopted a rule providing relief in the narrow circumstance in which all requirements of an exception other than the signature requirement are met. Under this rule, if the failure to comply with the signature requirements was inadvertent, the parties are given 90 days to obtain the signature. Otherwise, the parties are given 30 days to obtain the signature. As an example of a situation in which the 30-day requirement applies, CMS describes a contract that is under review by the physician's attorney at the time the financial relationship begins. Because of concerns that this not become a default method of complying with the regulatory requirements, CMS permits temporary noncompliance with the signature requirements by a DHS entity only once every three years with respect to a particular physician.  Again, the new rule provides relief only if the signature requirement is the only reason for noncompliance - no relief is provided for other requirements, including the requirement that there be a written agreement, that it specify the items or services covered, and that the compensation be set forth in the agreement before the services are rendered. However, unlike the proposed rule, no self-disclosure or CMS determination is required for compliance.

Obstetrical Malpractice Insurance Subsidies

CMS acknowledged concerns that the exception for obstetrical malpractice insurance subsidies, which requires compliance with the relevant Anti-Kickback Statute safe harbor, was too narrow to meet the legitimate needs for such subsidies. Therefore, in addition to permitting a subsidy if the requirements of the Anti-Kickback Statute safe harbor are met, the final rule permits a subsidy by a hospital, federally qualified health center, or rural health clinic if the following requirements are met: (1) the subsidy is provided to an obstetrician whose practice either is in a Health Professional Shortage Area (HPSA), a rural area or an area that the Department of Health and Human Services (HHS) acknowledges has demonstrated need through an advisory opinion, or is comprised of patients at least 75 percent of whom reside in a medically underserved area or are part of a medically underserved population, (2) the arrangement is in writing, signed and specifies the payments and terms under which the payments are to be provided, (3) the arrangement is not conditioned on the physician's referrals, (4) the amount of payment is not determined directly or indirectly based on the volume or value of actual or anticipated referrals, (5) the physician is permitted to establish privileges and refer business to other entities, (6) the payment is made to the malpractice insurance provider and the insurance is provided under a bona fide policy or program with the premium calculated based on a bona fide assessment of liability risk covered, (7) the physician treats obstetrical patients receiving assistance under any federal program on a nondiscriminatory manner, and (8) for each coverage period, at least 75 percent of the physician's obstetrical patients treated reside in a rural area, HPSA, medically underserved area or area with demonstrated need, or are part of a medically underserved population.

Per Unit and Percentage Compensation

In 2007, CMS proposed prohibiting per unit or per click compensation in space and equipment leases when the services giving rise to the compensation are referred by the physician lessor, and proposed permitting percentage compensation only when paying for personally performed physician services. As finalized, the limitation on per unit compensation is slightly broader than proposed but percentage compensation is prohibited only in space and equipment lease agreements.

Under the language of the final rule, rental charges may not be based on "[p]er-unit of service rental charges, to the extent that such charges reflect services provided to patients referred between the parties." This limitation on rental charges is imposed not only under the exceptions for space and equipment leases, but also in the fair market value exception (which is an alternative method of excepting an equipment lease) and in the exception for indirect compensation arrangements. CMS explains in the preamble that it is concerned about per-click leases when referrals are made from a physician lessor or from a DHS entity lessor to a physician lessee. CMS also discusses time-based rental arrangements, and concludes that "on demand" rental arrangements are essentially a per-click type of arrangement covered by the final rule. CMS recognizes that block leases may be structured to meet the requirements of the exception, but indicates it intends to study them and may propose rulemaking in the future.

The final rules prohibit rental charges based on a percentage of revenues raised, earned, billed, collected or otherwise attributable to performance of services in the rented space or with the rented equipment. The language of this prohibition is broader than the prohibition of per-unit charges, in that it does not matter whether the services arise from referrals between the lessor and lessee. Like the limit on per-unit charges, the limit on percentage payments is included in the fair market value exception and exception for indirect compensation arrangements, as well as in the office and equipment lease exceptions.

CMS indicated that in adopting the rules in this manner, it is focusing on its primary concerns with use of percentage compensation outside the context of personally performed physician services, but intends to monitor use of percentage compensation in other areas and may impose further restrictions in future rulemaking if appropriate. Among the arrangements CMS discussed as outside the scope of the prohibition, but subject to continued monitoring, are arrangements in which physicians pay on a percentage basis for management and billing services. In discussing commenters' concerns that the proposed rule would limit payment of a percentage of savings in a gainsharing program, CMS noted that this final rule would not prohibit such payments, and that it is interested in permitting properly structured incentive payment and shared savings programs, but reminded readers that percentage-based payments may not always result in payments that are consistent with fair market value for the services rendered.

Recognizing that these changes may require existing arrangements to be restructured, CMS delayed the effective date for the rules on per-unit and percentage compensation to October 1, 2009. 

Expansion of Definition of "Entity" to Encompass "Under Arrangements" Service Providers

In the 2007 proposed rule, CMS discussed its concerns with "under arrangements" transactions, in which a physician-owned entity provides services to a hospital's patients and those services are billed by the hospital as hospital services. It indicated that such arrangements raised risks of overutilization and anti-competitive behavior. In the final rule, CMS adopted the rule largely as proposed, expanding the definition of an "entity" that is considered to furnish DHS to include both the entity that performed the services and the entity that presented the claim to Medicare for the DHS. In the proposed rule, CMS had also included an entity that caused a claim to be presented, but that language was not included in the final rule. Thus, where a physician-owned entity performs services that are billed by the hospital "under arrangements," both the hospital and the physician-owned entity are treated as DHS entities with respect to those services. The physician's ownership interest in the physician-owned entity must therefore meet an ownership exception if that physician makes referrals for the relevant services. As a practical matter, this will preclude physician-owned entities from performing services that are billed by a hospital under arrangements if the physician-owners make referrals for such services, unless the ownership interest meets the exception for ownership interests in rural providers.

Commenters requested a definition that would clarify when an entity is considered to "perform" DHS, but CMS indicated that "perform" has a common meaning and declined to provide a definition. As an example of an entity that does perform a service, CMS indicated that an entity that does the medical work for the service and could bill for it is considered to perform the service, but took pains to clarify that this does not mean a physician-owned entity can avoid application of the statute by doing substantially all of the necessary medical work and having a different entity complete the service. CMS further noted that it does not consider an entity to perform DHS if it leases or sells space or equipment used in performing a service, or it provides management, billing services or personnel to the entity performing a service. Last, CMS indicated it is not taking the position that a physician-owned implant or medical device company necessarily performs DHS.

CMS also addressed comments from providers of services, including cardiac catheterization and lithotripsy services, that are not DHS when performed outside a hospital setting. CMS indicated it was not convinced that therapeutic services are less subject to abuse than diagnostic services, and concluded that services billed by a hospital as inpatient or outpatient hospital services are DHS, regardless of the nature of the services as diagnostic or therapeutic. Thus, an entity that performs services under arrangements for a hospital is a DHS entity under the final rules, regardless of whether the service itself would be DHS outside the hospital setting. However, in deference to existing case law, CMS recognized lithotripsy as not being DHS even if billed by a hospital.

Like the changes in payments under lease arrangements, CMS recognized that these changes will require many arrangements to be restructured, and thus set a delayed effective date of October 1, 2009.

What's on the Horizon?

While DHS entities and physicians are working to restructure their per-unit and percentage-based compensation arrangements and "under arrangement" transactions, CMS will continue to consider further modifications to the Stark regulations. CMS has indicated that it is considering ways in which the in-office ancillary services exception relied on by group practices should be modified or limited to prevent abuse and overutilization in the provision of diagnostic testing services. In addition, CMS is likely to move forward with finalizing a proposed rule protecting certain incentive payment and shared savings/gainsharing arrangements between hospitals and physicians.

Finally, hospitals and health systems should be on the lookout for a Disclosure of Financial Relationships Report (DFRR) from CMS. In the 2009 Final IPPS Rule, CMS reiterated its commitment to send the DFRR to hospitals, which will require hospitals to disclose detailed information regarding their financial relationships (both compensation arrangements and ownership interests) with referring physicians. CMS indicated that it intends to send the DFRR to 500 hospitals, but that such number may be decreased based on comments CMS receives with regard to its DFRR proposal. CMS must first issue a Paperwork Reduction Act notice in the Federal Register regarding its DFRR proposal and accept public comments on the proposal before it is finalized. CMS has indicated that, of the projected 500 hospitals who will receive the DFRR, 290 will be hospitals that received a request to disclose physician financial relationships as part of a voluntary survey CMS issued in 2006 but failed to respond to the request. CMS provided no indication how it will select the remaining 210 hospitals. CMS modified the burden it projected would be placed on hospitals in completing the DFRR from an anticipated 31 hours to 100 hours.

If you have any questions regarding how the new Stark regulations impact your financial relationships or operations or would like further information regarding anticipated future developments with regard to the Stark law, please contact Catherine Dunlay, co-Leader of SZD's Health Law Practice Group, at 614.462.2236 or cdunlay@szd.com, or Kevin Hilvert, an associate in SZD's Health Care Practice Group, at 614.462.4921 or khilvert@szd.com.